My friend Atul Shah of Suffolk Business School asks questions of KPMG's latest annual report:
The growing size and influence of Big 4 global accounting firms, and their supermarket of business consulting and advisory services, is generating alarm among scholars concerned about ethics, independence, and truth. Our research at Suffolk Business School has raised a number of questions about their ethics, conflicts of interest and culture. There is confusion as to whether they are a regulator of business, or help business escape regulatory control through skilled professional services — the primary driver seems to be maximising profit. We also found high level corporate and political networks and influence on government and regulatory processes.
Given that they are world ‘experts' in accounting, one would expect that their own Annual Report is clear, legally compliant and transparent. I tell my MBA students to read annual reports very carefully — it's a bit like asking people to write their own evaluation, so objectivity will be compromised. The latest annual report by KPMG UK, sadly falls short of objectivity and transparency. Here are the specific concerns it continues to raise:
- It claims to have paid £786mn to HMRC from before tax profits of £383mn. This seems very generous, until one discovers that the tax paid includes £673m (e.g. PAYE and VAT) where KPMG are merely a tax intermediary;
- The governance of the firm is still primarily closed — all executives and non-executives are partners of the firm, and there is no cultural/national diversity in spite of it being a global firm and stated aspirations about inclusiveness. Quoted companies have to have independent non-executive directors by law, and this is policed by Big 4 firms, but somehow such a rule does not apply to them.
- The ‘independent' Public Interest Committee (whose legal status is unclear, and appointments are made by KPMG) was previously Chaired by Sir Steve Robson. Our research raised a number of questions about the conflicts of interest from this appointment. He has now been replaced by a new Chair, Prof Laura Empson, who claims that ‘public interest is notoriously difficult to define.' How about ensuring that audits are genuinely independent and clients challenged robustly for aggressive accounting?
- There is an acknowledgement of the ‘debate on tax' and the need for companies to change their ethics and practices, with KPMG trying to be at the forefront of this new era.
- The most critical audit area would be contingency provision for fines and losses relating to the major multi-billion pound business failures where KPMG were auditors and are being investigated — e.g. Co-op Bank and HBOS. There is virtually a total silence about these real threats, including from the Public Interest Report. The declarations here are very vague, citing insurance cover and commercial confidentiality, and there is a cop-out clause used by both KPMG and their auditors Grant Thornton — there is a ‘significant degree of inherent uncertainty in the assumptions and estimates'. Does this mean the audit is qualified because of this uncertainty? Word play is used not to give an audit opinion in risky areas — precisely where people need a good audit. Should we be surprised given the audit industry's mastery in regulatory arbitrage?
- Our research raised a number of questions about their ethics policies and practices. In particular, we were concerned that there were no rules or explicit pro-active monitoring and enforcement processes e.g. there were no rules or limits on client entertainment, a direct conflict of interest. The latest report explains that policies are being developed in this area — so no rules in sight again then.
- One major expansion area for the firm has been in the provision of legal services, where they grew by 53% in one year, and more growth is expected. KPMG claim that clients really like their ‘multi-disciplinary services'. However, this can also further increase conflicts of interest — not only is the firm an auditor, but it is now also a lawyer, and a tax advisor, consultant….The risks generated by such conflicts for audit quality are growing.
- Our research raises major question marks about the systemic role of Big 4 firms in ‘regulatory arbitrage' activities — using their knowledge of rules and regulations to help clients avoid them — something well known in the area of tax avoidance. The latest KPMG report sadly reinforces this view. Regulatory management is one of their core business activities.
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“Prof Laura Empson,claims that ‘public interest is notoriously difficult to define.’
Given the IFRS complexities and the apparent interpretive plasticity one cannot help but take the view that difficulcy is a friend, indeed a necessary tool, to the auditing and accounting profession.
For me public interest assurance statements issued by auditors in respect of their own accounts and the accounts of public company clients are essential and the Flint bill should be looking at public interest reporting standards.
For those with a memory beyond the past few years, they will know that the morally corrupt and socially incestual relationships within and between the major accounting firms and their global corporate clients can easily lead to any one of them failing at any time.
They are all equally as bad as each other, Arthur Andersen were the unlucky one that got caught with their fingers in the cookie jar and their pants so far down they could no longer raise their heads in polite society.
Who will be next – any one of them, or all of them. Too big to fail?
Well they should either be left to fail and we all suffer the consequences, or they should be broken up and separated into the very different and clearly conflicting functions that they undertake. Just like the banks who are after all still their biggest clients.
Split them all up, change the ownership structures and regulations which control their behaviour and start the change in our society where it needs to be made most – at the top!
I thought he conflict of interest was reminiscent of Arthur Andersen as well. Auditors are meant to be independent. Mind you, I don’t see how an accounting firm can be “too big to let fail”.
Kpmg have proved many times they can’t run their business. Their 2pc revenue increase and loss of profits matched by a partner capital call and increases to their working capital plus firing 50 partners demonstrate this. I am always amused when there is a suggestion that they are capable of running some big conspiracy around influencing the govt over tax policy. Frankly they couldn’t run a bath
On your legal comment, they can provide only extremely limited legal services to audit clients per the rules so the conflict of interest point in this around the audit independence does not exist. Many of the big4 firms are trying to strategically lose big audits as they are no longer “loss leaders” to more profitable parts of the firm, far more profitable to provide non audit services to another firms audit clients
@keith. I would love to lose our audit practice, we would lose a raft of regulation about what we can and can’t do for large clients, and how we bill them for it!
Very good news Anth – there should be little resistance to making audit a public service, paid for by the corporations on behalf of all their stakeholders not just their shareholders.
We don’t entrust private (for profit) police forces to monitor and enforce regulations for obvious reasons, so I do wonder why anyone outside the corporation (or even beyond the FD) has any trust in private (for profit) auditers.
That is no disrespect to the individuals who perform audits, I know many and can vouch for most of their integrities. But at a systemic (and partner) level it is obvious that self-interest will always cause a conflict of interest.
i suspect you wont find any non-audit partners resisting the idea of taking the audit service into a public body frankly – although it rather begs the question of who pays any fine for negligence in respect of an audit at that point
Many of these are good points, but the first two are silly. KPMG operates as a partnership in the UK, so of course it doesn’t pay corporation tax itself. KPMG isn’t a listed company so of course the rules on non-executive directors don’t apply to it.
There is nothing to stop KPMG adopting good practice
And it chose to disclose misleading tax data
The reasonable inference is that Dr Shah didn’t understand the difference between a partnership and a company, which is rather disappointing.
As for your comments:
– it’s not good practice at all – it’s a non-sequitur: partnerships don’t have directors (non-executive or otherwise).
– I’m not sure I understand your tax point. Are you suggesting they are avoiding tax? Or merely that they should include a statement making explicit that they’re a partnership and so their profits are taxed at the level of their partners? “Misleading” seems a bit unfair.
Yours is an unreasonable inference: the issue being highlighted was the nonsensical nature of the tax disclosure
The only fool here is you, who clearly does not know the difference between a partnership and an LLP
“A UK limited liability partnership is a corporate body – that is to say, it has a continuing legal existence independent of its members, as compared to a Partnership which may (in England and Wales, does not) have a legal existence dependent upon its membership.”
So it is a corporate body, but pays no corporation tax. Talk about making up the rules to suit your own (or your friends) interests!
I should add, I use an LLP
insult aside, you didn’t answer my question: an LLP is a partnership for tax purposes, so what precisely is your point?
I was pointing out you were making unjustified inferences by showing the weakness in your own argument
Kpmg are a private partnership run by the people who finance it. I struggle to see how their governance would be improved by appointing non execs.
You might
Those with concern for the public interest might not
The problem is all yours
‘I should add, I use an LLP’
There are obviously significant differences between a partnership and an LLP. I have no doubt that the non-executive directors of your own structure fully support your work, but still perform the oversight function so absent from the likes of KPMG
“It claims to have paid £786mn to HMRC from before tax profits of £383mn. This seems very generous, until one discovers that the tax paid includes £673m (e.g. PAYE and VAT) where KPMG are merely a tax intermediary”
Yes, as page 46 of the report makes clear, the £673m includes £229m of payroll taxes and £212m of VAT, but it also includes £231m of tax paid on behalf of the partners on their share of the firm’s profits. £231m is also quite generous compared to profits of £383m, but of course the cash tax paid in that year relates to profits earned in earlier years. As discussed in the report itself, and here: http://www.taxresearch.org.uk/Blog/2016/03/08/kpmg-really-do-have-to-learn-how-to-account-for-tax/
“Quoted companies have to have independent non-executive directors by law, and this is policed by Big 4 firms, but somehow such a rule does not apply to them.”
Indeed not: KPMG is not quoted and it is not a company, so unsurprisingly it is not subject to the rules that apply to quoted companies. There is no requirement for a private company, partnership or LLP to have non-executive directors, members or partners.
In any event, KPMG do not “police” compliance with the Companies Act, FSMA or the Listing Rules.
“The ‘independent’ Public Interest Committee (whose legal status is unclear …”
Subject to compliance with legal requirements, a partnership or LLP is more or less entitled to govern itself internally as it sees fit, but pages 123 and 145 of the report explain why there is a “Public Interest Committee” and what it does. The FRC’s Audit Firm Governance Code requires the involvement of independent people to enhance confidence in an audit firm’s decision-making, dialogue and management, mainly focussing on audit quality, reputational risks, and prevention of firm failure. See the PIC’s report on pages 67-69.
So the question remains for Richard: what is wrong with the tax disclosure in KPMG’s report. The honest approach is to identify a problem or apologise for having been mistaken. What’s not honest is to insult those asking the question.
I hold no candle for KPMG, but Richard does his credibility no good by making vague insinuations that he then walks away from.
KPMG did not pay most of that tax
Their employees did
That was what was wrong
Couldn’t you spot that?
How could it be otherwise? KPMG is a partnership and so, by definition, pays no tax on profits itself. Page 46 could not be clearer.
It is exactly as if I were to blast Tax Research LLP for paying no tax. If I did that, all I’d reveal is my ignorance of the tax system.
Ciaran
You are getting tedious
The words flogging, dead and horse come to mind
Richard
Keith, the LLP’s partners pay UK income tax, and this will usually result in more overall tax being paid than if the business was a company and the partners received employment income and dividends.
True
Usually? Does that mean depending on the level of tax avoidance undertaken by all those concerned!
See Kpmg Ireland for more details…….
No – it’s because corporate tax rates are lower than personal rates.
Keith
I was recently involved on a minor Trust tax matter for a client who was co-Trustee of a family Trust with his son, a partner in the insurance section of a Big 4 accountancy practice. Despite the wholly innocent nature of the Trust and the minimal involvement of the son I had to meet with the tax compliance department of the LLP to spell out exactly what was happening. As the person I met explained “as a Big 4 partner, you cannot be seen to be involved in any tax planning outside pure vanilla schemes endorsed by HMRC. We have to be cleaner then clean.”
If you want to indulge in self-gratifying fantasies that Big 4 partners are “up to something” by all means do, but it just isn’t true, for obvious PR reasons.
I only have your word for it
So you found an apparently honest one Andrew Carter, well done but that hardly proves that they all are – as the alleged KPMG Ireland tax evading partners provide a good counter example. Interestingly while searching for the details of this I found a 2003 US SEC case against KPMG audit partners for false accounting.
http://www.sec.gov/news/press/2003-16.htm
So while I am sure that even 95% of Big 4 partners could be whiter than white, I am equally sure that some of them (at very senior levels) are not. From personal experience, I was encouraged to ensure the results of a commercially sensitive report were in line with the client partner and his client’s expectations during a conversation that included the client partner emphasising he was expecting to purchase his new swimming pool this year and did not expect to be let down!
These two examples are both pre-2008, and I am willing to believe they may have modified their ways somewhat with the realisation of what the results of their previous excesses could be. But to deny an obvious conflict of interest between the relationship and activities of major accounting/consulting/tax and audit firms with their largest clients is naive to say the least in my opinion.
I was referring to the 4 Kpmg Ireland partners arrested for tax fraud
I think it’s true to say some big 4 firms are stricter than others in this respect. I would guess you client was a PwC partner. They are not allowed to do anything but claim statutory reliefs. Even something like investing in something like an Hmrc approved EIS investment had to be approved. Kpmg appear to operate differently!
Good morning Richard,
I know you are busy with budget issues, so may have missed my earlier comment.
Do you have non-execs sitting on your LLP structure ?
Thanks
No I don’t
But I turn over less than £870k most years
However, my funders do require I have an advisory team to draw in and they require me to account in writing at some length each quarter on how I have used the funds and can challenge any issue they wish
That’s a pretty powerful governance structure instead